Automobiles use oil for their operations. This means that automobiles and oil are complementary goods (Economides & Salop, 2012). This indicates that they are used together. When the oil prices increases, the demand for automobiles decreases. The automobiles demand curve shifts to the left from D1 to D2 as illustrated in the diagram below:
Currently, some of the materials used in home insulation are made from oils. A good example is foam which is actually made from petrochemicals. An increase in the price of oil means that the home insulating materials price will also increase. This price increase will consequently lower the demand for home insulation as the insulating materials become expensive. The demand curve for home insulation shifts to the left from D1 to D2 as illustrated in the diagram below:
Oil and coal are close substitutes (Borenstein, 2010). This means that either can be used in place of the other. When the price for oil increases, the demand for coal increases as consumers shift to coal which is less expensive compared to the oil. As a result, the demand curve for coal shifts to the right direction from D1 to D2 as illustrated in the diagram below:
Most tires are made from synthetic rubber which is manufactured by use of oil. Increase in price of oil increases the price of the tires. This means that the demand for tires decreases due to the increased prices and therefore the demand curve for tires shifts to the left from D1 to D2 as illustrated below:
When the price of oil increases, transport cost also increases. Most people who use public and personal transport means tend to use bicycles for transport. This means that the demand for bicycles will increase and the demand curve will shift to the right from D1 to D2 as illustrated:
Example: suppose only 50 pieces of wood are available and one can either produce 30 tables or 20 cupboards; if one chooses to produce 30 tables, the opportunity cost involved is 20 cupboards (no more pieces to produce cupboards) and if one chooses to produce 20 cupboards the opportunity cost involved is 30 tables (no ore pieces to produce tables). This is illustrated in the diagram below whereby as the quantity of one good produced (table or cupboard) increases the quantity of the other good decreases.
Borenstein, S. (2010). The long-run efficiency of real-time electricity pricing. The Energy Journal, 93-116.
Coenen, G., Mohr, M., & Straub, R. (2009). Fiscal consolidation in the euro area: Long-run benefits and short-run costs. Economic Modelling, 25(5), 912-932.
Dixit, A. K., & Stiglitz, J. E. (2014). Monopolistic competition and optimum product diversity. The American Economic Review, 67(3), 297-308.
Economides, N., & Salop, S. C. (2012). Competition and integration among complements, and network market structure. The Journal of Industrial Economics, 105-123.
Kline, P., & Walters, C. R. (2016). Evaluating public programs with close substitutes: The case of Head Start. The Quarterly Journal of Economics, 131(4), 1795-1848.
Pearce, D., & Markandya, A. (2009). Marginal opportunity cost as a planning concept in natural resource management. The Annals of Regional Science, 21(3), 18-32.
Raiklin, E., & Uyar, B. (2016). On the relativity of the concepts of needs, wants, scarcity and opportunity cost. International Journal of Social Economics, 23(7), 49-56.
Yang, X., & Heijdra, B. J. (2013). Monopolistic competition and optimum product diversity: Comment. The American Economic Review, 83(1), 295-301.
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